Circular
Section 20 Subsidiaries of Bank Holding Companies
October 8, 1996
Circular No. 10879

Treatment of Interest Earned When Underwriting and Dealing in Securities
Effective November 12, 1996

To All Bank Holding Companies, and Others Concerned, in the Second Federal Reserve District:

Following is the text of a statement issued by the Board of Governors of the Federal Reserve System:

The Federal Reserve Board has announced that it is adopting a change in the manner in which interest earned on certain securities held by a company in an underwriting or dealing capacity is treated in determining whether the company is engaged principally in underwriting and dealing in securities for purposes of section 20 of the Glass-Steagall Act.

The amendment is effective November 12, 1996.

Section 20 of the Glass-Steagall Act prohibits a member bank from being affiliated with any company "engaged principally" in underwriting and dealing in securities that a member bank may not underwrite or deal in (ineligible securities). In order to ensure compliance with section 20, the Board requires that the revenue a bank holding company subsidiary derives from underwriting and dealing in ineligible securities not exceed 10 percent of the total revenue of the company.

The Board is amending its section 20 orders to specify that interest earned on the types of debt securities that a member bank may hold for its own account shall not be treated as revenue from underwriting or dealing in securities for purposes of section 20. Interest on these securities will continue to be included in total revenue.

Section 20 subsidiaries may use this method to compute compliance with the revenue limitation in reports filed with the Board after the effective date.

The text of the Board's official notice, as published in the Federal Register of September 17 is available. Questions on this matter may be directed, at this Bank, to Brian Peters, Examining Officer.